The current issue of the Business and Corporate Litigation Committee Newsletter of the ABA's Business Law Section has recently been distributed. Here is a link to it. ( I serve as the Editor and Chair of the Newsletter Committee and Peter Valori of Miami serves as Co-Editor and Vice Chair.)
Professor Mark Roe of Harvard Law School presented today the 23rd Annual F.G. Pileggi Distinguished Lecture in Law in Wilmington, Delaware, to members of the Delaware Bench and Bar at the Hotel duPont at 8:00a.m. The Lecture was entitled: "Does Delaware Compete?" ( The lecture series is named after my father -- for those noticing the different initials.) The presentation was approved for one hour of CLE credit in Delaware and Pennsylvania. Here is a more detailed summary of Professor Roe's scheduled presentation.
I understand that Professor Larry Hamermesh will be providing a summary of Prof. Roe's Lecture on the Harvard Corporate Governance Blog in the near future.
Among Professor Roe's many publications is his law review article entitled Delaware's Politics, 118 Harv. L Rev. 2491 (2005), in which he examines the interplay between Delaware's role in forming and monitoring the nation's corporate governance law and the ability of the U.S. Congress to displace Delaware in that capacity.
Here is a post on the 22nd Annual Pileggi Lecture presented by Professor Hillary Sale. Here is a post on the 21st Annual Pileggi Lecture by Professor Stephen Bainbridge, including a link to his law review article prepared in connection with the Lecture which, like each of the annual presentations, is intended to form the basis of an article for Widener's law review.
UPDATE: Here is a post about the Lecture on the Harvard Corporate Governance Blog.
UPDATE II: Here is an article about the Lecture in The Delaware Law Weekly.
In Twin Bridges Limited Partnership v. Draper, et al., 2007 WL 44609 (Del. Ch., Sept. 14, 2007), read opinion here, the Chancery Court explains in exhaustive detail the intricate facts of internecine warfare among family members engaged in a dispute over the governance of a family limited partnership that owns 250 acres of valuable real estate. Along the way, the court analyzes several sections as well as the legislative history of the Delaware Revised Uniform Limited Partnership Act ("DRULPA") in connection with challenged amendments that were made to the parties' Limited Partnership Agreement in an effort to add an addtional general partner. The amendment was made with a majority of the ownership interests, in order to avoid a deadlock between two general partners. There are many important parts of this lengthy opinion that warrant further discussion, such as when fiduciary duties of general partners are waived in the context of a limited partnership agreement--and if fiduciary duties are waived by agreement, as allowed by statute, what is the standard of review.
However, my favorite part of this opinion, and one that comes from a hallowed Delaware Supreme Court case, is the concept that a court of equity can, and in some cases has, barred behavior that strictly complies with a statute, but which may still be inequitable. That principle and power, in a nutshell, is what makes a court of equity such a special place in our post-modern world.
The foregoing is an important concept that embodies, at least for me, the essence of the Chancery Court. Thus, despite its length, I am going to excerpt below part of the reasoning why the court refused to dismiss at this stage, the claims for breach of the duty of loyalty against the general partner who amended the agreement, with majority support, in full compliance with the DRULPA, in part, so as to eliminate (lawfully) any fiduciary duties:
First, I address Plaintiffs' contention that because Schutt approved the integrated transaction in keeping with the OPA [the original partnership agreement] and DRULPA, she "was not restricted by any fiduciary obligation from voting her interest as she saw fit." [FN129]. Under Schnell v. Chris-Craft Industries, Inc., strict compliance with the Delaware Corporation Law in changing the by-law date was insufficient to insulate management from a breach of fiduciary duty claim-- "inequitable action does not become permissible simply because it is legally possible." [FN130] As the fiduciary duty of loyalty of a general partner may be similar to that of a corporate director, Schnell has been extended to the limited partnership context on multiple occasions. [FN131] Thus, while the integrated transaction may be valid under the OPA and DRULPA, that does not necessarily immunize Schutt from a claim that she breached her fiduciary duty of loyalty to the Partnership in spearheading that transaction.
FN129. See POB at 31.
FN130. 285 A.2d at 439.
FN131. See, e.g., Alpine Inv. Partners v. LJM2 Capital Mgmt., L.P., 794 A.2d 1276, 1284 n.13 (Del. Ch.2002); Juran v. Bron, 2000 WL 1521478, at *19-20 (Del. Ch., Oct. 6, 2000).
Secondly, Plaintiffs argue that Defendants' breach of fiduciary duty claim is not ripe because no self-dealing transactions have occurred to date, and Defendants have not alleged any such act. Thus, Plaintiffs contend that Defendants' claim rests on speculation.
Citing Hollinger International, Inc. v. Black, [FN132] Defendants counter that "[g]overnance changes motivated by a desire to impose unfair self-dealing transactions over Mr. Draper's objection are plainly actionable." [FN133] In Hollinger, this Court struck down a set of bylaw amendments, adopted under the direction of Hollinger's controlling shareholder Conrad Black, whose "plain purpose" was to disable Hollinger's board and prevent it from completing a review of alternative strategic transactions that Black was contractually required to further. [FN134] By striking the bylaws, the Court enabled "the board [to] take good faith action, within its domain, without being subject to a veto by Black or other directors subject to his control." [FN135]
FN132. 844 A.2d 1022 (Del. Ch.2004).
FN133. DOB at 46.
FN134. Hollinger Int'l, 844 A.2d at 1081.
FN135. Id. at 1082.
Under Delaware law, to be ripe a claim "must allege that present harms will flow from the threat of future action." [FN136] Here, Defendants allege that Schutt has engaged in a scheme to impose unfair self-dealing transactions on the Partnership. In Hollinger, Black caused the adoption of a governance change to restructure the power of the board. In this case, Defendants accuse Schutt of using the Amendment and Merger to facilitate self-dealing transactions that potentially will benefit Schutt and her allied partners.
FN136. Energy Partners, Ltd. v. Stone Energy Corp., 2006 Del. Ch. LEXIS 182, at *27 (Oct. 11, 2006).
Furthermore, in Delaware, "[a] court may find a case [ripe] where the interest in postponing review until the question arises in a more concrete and final form is outweighed by the immediate and practical impact on the party seeking relief." [FN137] Certain aspects of the challenged actions of Plaintiffs implicate this proposition, as well. Having found nothing inconsistent with the OPA or DRULPA in the aspects of the Amendment and Merger that effectively amend the OPA to provide for three, rather than two, general partners and elevate Osborn to the status of a general partner, I conclude that the implementation of those changes would not be inequitable. The situation is more murky, however, as to Paragraph 29(e) of the NPA, which purports to eliminate fiduciary duties in connection with the development and implementation of a Development Plan. Plaintiffs effected that change to the OPA without any prior notice to, or consultation with, Defendants. Rather, they presented Defendants with a fait accompli. [FN138] Because Paragraph 29(e) of the NPA purports to eliminate all fiduciary duties with respect to Development Plans, if this Court were to grant Plaintiffs' motion to dismiss, any future review of a self-dealing transaction by Schutt as part of such a Plan would be subject only to a lesser standard of the implied covenant of good faith and fair dealing. [FN139] Limiting Defendants' rights to challenge future Partnership actions on a Development Plan in that way would have an immediate and practical impact on Defendants. It would make it more difficult, for example, for Defendants to challenge a Partnership decision based on the use of some form of discretionary or family pricing. I view Defendants' claimed need to challenge Plaintiffs' effort to eliminate any fiduciary duties regarding Development Plans as outweighing any interest Plaintiffs or the Court might have in postponing that issue until it arises in a more concrete context. Accordingly, I hold that Defendants' challenge to Paragraph 29 of the NPA as a breach of Schutt's fiduciary duties is ripe for adjudication.
Notably, the foregoing conclusion was reached after the court's discussion and analysis of the covenant of good faith and fair dealing--and a finding that the covenant was not breached.
Also noteworthy was the court's application of the principle that equity will drill down to address the substance of contested transactions as opposed to being limited by the mere form of a transaction. In this case, the court treated a two-step related transaction as if it were one integrated transactions for analytical purposes.
For more background details, and further legal analysis, read the whole opinion at the above link. The court's own introductory summary of the case follows.
This case involves a dispute over the governance of a family-owned limited partnership, Twin Bridges, which owns a 250 acre parcel of real estate in Chadds Ford, Pennsylvania. The partners of Twin Bridges are the surviving children of the late Katharine Reeve Draper and their children and spouses. Mrs. Draper established the partnership in 1985 for estate planning purposes and named two of her seven children, Katherine Draper Schutt ("Schutt") and Ford B. Draper, Jr. ("Draper"), as general partners with authority to make all major decisions. The other siblings and Mrs. Draper had no management authority in Twin Bridges.
In recent years Schutt and Draper have disagreed on some important issues, thereby effectively creating gridlock within the partnership. To circumvent this problem, Schutt and most of the limited partners, who collectively hold 87% of the interests and voting power in Twin Bridges, decided to pursue a solution without involving Draper and his two sons. On August 16, 2006, the partners aligned with Schutt acted by written consents to amend the partnership agreement and then to merge the partnership into a newly-formed limited partnership with a different governance structure. The new partnership agreement provides for a third general partner, Plaintiff Prudence Draper Osborn ("Osborn"), who is a sister of Schutt and Draper. The parties agree that these actions did not change any partner's "economic interests" in the partnership.
The same day they effected the merger, Schutt and the limited partners aligned with her ("Plaintiffs") filed this action seeking a declaration of validity as to: the amendment to the partnership agreement, which authorizes the approval of a merger by partners holding two-thirds of the partnership interests; the merger of the partnership into another Delaware limited partnership; and the merger agreement pursuant to which the merger was effected. Draper and his sons filed an Answer, Counterclaim and Third-Party Complaint, [FN1] asserting four claims for: (i) breach of contract against all Plaintiffs (Count I); (ii) a declaration of invalidity of the amendment and merger against all Plaintiffs under the Delaware Revised Uniform Limited Partnership Act ("DRULPA") [FN2] (Count II); (iii) breach of fiduciary duty against Plaintiff Schutt (Count III); and (iv) aiding and abetting a breach of fiduciary duty against all Plaintiffs other than Schutt (Count IV).
FN1. The Counterclaim and Third-Party Complaint are referenced herein as the "Counterclaim."
FN2. 6 Del. C. §§ 17-101 to 17-1111.
Currently before the Court are Plaintiffs' motion for summary judgment on their declaratory judgment claim and Defendants' cross motion for summary judgment on the first two counts of their Counterclaim, which relate to the same subject matter as Plaintiffs' claim. In addition, Plaintiffs have moved to dismiss all of Defendants' Counterclaims for failure to state a claim.
For the reasons stated, I conclude that the amendment and the merger effected by Plaintiffs, whether they are considered in combination as part of a single, integrated step transaction, or separately, are valid because they comply with Paragraph 31 of the partnership agreement, do not violate the implied covenant of good faith and fair dealing, and do not violate DRULPA. As to Plaintiffs' motion to dismiss, I grant it as to Counts I and II of the Counterclaim, which seek to declare the amendment and merger invalid for failure to comply with the partnership agreement and DRULPA. I deny the motion to dismiss, however, as to Counts III and IV to the extent they relate to aspects of the new partnership agreement beyond those that change the governance structure of Twin Bridges from having two to three general partners.
In Mogavero v. Greenberg, 2007 WL 2713843 (Del. Ch., Sept. 12, 2007), read opinion here, the Chancery Court explored the nuances and contours of a specific contractual term that required cooperation in connection with applying for building permits as a result of a compromise to consummate the settlement on property of contiguous property owners. In effect, the court observed, the specific contract term expanded and emphasized the pre-existing implied duty of good faith and fair dealing inherent in every contract. The facts of this case are not likely to be duplicated often, but there is an aspect of the case that may have frequent application. Namely, if one term of an agreement is not complied with, when does that allow the other party to withhold performance. Unless the contract specifically addresses it, the answer is that one party must materially breach the agreement before another party's performance will be relieved. In this case, although the provision at issue also required payment of attorneys' fees incurred in the permitting process, the agreement did not authorize suspension of the duty of cooperation simply because the attorneys' fees were not paid on a timely basis.
Although I only occasionally summarize on this blog decisions of the Delaware Superior Court, the trial court of general jurisdiction in Delaware, for example, when they are of special commercial import or they apply generally to business litigators, this is such an instance.
In Dunlap v. State Farm Fire and Casualty Co., 2007 WL 2390682 (Del. Super. 2007), read opinion here, the Delaware Superior Court granted a Motion to Disqualify filed by one party, based on Rule of Professional Conduct 3.7 which prohibits attorneys advocating in a trial to also serve as witnesses, but then, sua sponte, (which for the non-Latin lovers among my readers, means "on its own"), the Court also disqualified the opposing attorney who filed the motion. The Court reasoned that: both attorneys "... used some very strong language about positions the other side has taken....[and] it is beyond proper vigorous advocacy. Both counsel have lost too much professional detachment in their "vigorous" advocacy.The Court, therefore, believes that both sides need new counsel."
Far be it from me to pontificate, as there but for the grace of God go I, though it is easy to observe that litigation should not be about the lawyers, and as hard as it is to do, even if the other attorney is insulting and boorish, the goal is to focus on the issues in the case. Here and here are two separate follow-up opinions denying a motion for reargument and denying a motion for "clarification" of the ruling.
When I am up to date on my summaries of court decisions from Delaware's Chancery Court and Supreme Court, I often refer to interesting cases in other Delaware courts or the courts of neighboring jurisdictions, such as the Delaware County (PA) Court of Common Pleas, which is the trial court of general jurisdiction just across the state line from Wilmington.
Here is a case that I thought was notable simply for a passing observation about personal jurisdiction over businesses (such as hospitals) that serve residents of neighboring states.
In Glick v. Christiana Health Care Services, et al., Del. Cty. Ct. Cm. Pl., (PA), 94 Del. Rep. 285 (July 2007), read opinion here, Judge George Pagano ruled on post-trial motions regarding a malpractice claim against a Delaware hospital and Delaware doctors who treated someone who resided in Pennsylvania The court dismissed a doctor on jurisdictional grounds but the opinion appears to reflect that the parties conceded the court's jurisdiction over the Delaware hospital.
In re Tyson Foods, Inc., 2007 WL 2685011 (Del. Ch., Sept. 11, 2007), read opinion here. This is a classic Chancery Court discovery dispute that is addressed as surgically as any substantive issue in the case would be. See here for summary of prior decisions in the case and links to same, with more background facts, such as the decision that partially granted and partially denied a motion to dismiss. See In Re Tyson Foods, Inc. Consol. S'holders Litig., 919 A.2d 563 (Del. Ch.2007).
This short letter opinion includes the basic analytical framework for the scope of discovery and when it will be compelled based on Chancery Court Rule 26(b)(1) and reference to Dann v. Chrysler Corp., 166 A.2d 431, 432 (Del. Ch. 1960)(ultimately leaving it to the discretion of the court). Although the scope of discoverable data is broad as it includes anything that is reasonably calculated to lead to the introduction of admissible evidence, the court retains the discretion to prevent "fishing expeditions".
The court rejected arguments that compelling documents requested by plaintiffs was an "end run" around the purpose behind a pre-suit demand requirement. That argument can be made if the plaintiffs attempt to amend the complaint. Likewise, compelling the requested documents was not contrary to the point made in the Dann case, as the discovery sought was not for the sole purpose of looking for new causes of action. The court required production of documents in connection with related party transactions.
The court denied the part of the motion to compel that sought supplemental answers to interrogatories. The plaintiffs argued that defendants abused Rule 33(d) which allows reference to documents that have the answers when the burden of deriving the answers is about the same for the party serving the documents as for the party on whom they are served. The court reasoned that the answers sought were more efficiently obtained by deposition. The court also allowed additional time for depositions depending on what was learned from the new documents produced.
Conrad v. Blank, 2007 WL 2593540 (Del.Ch., Sept. 7, 2007), read opinion here. This Chancery Court decision allowed a stock option backdating claim to proceed and denied a Motion to Dismiss that alleged failure to make a pre-suit demand. The opinion included a complete overview of the analysis applicable when pre-suit demand must be made as a prerequisite for a shareholder to bring a derivative suit, and when pre-suit demand is excused as futile pursuant to the seminal Aronson and Rales cases.
The court referred to two prior stock option decisions by the Chancery Court, and followed the reasoning in the recent decision in Ryan, summarized here, but distinguished the recent decision in DeSimone, summarized here. Despite no "continuous wrong" exception being applicable here to the "contemporaneous ownership rule", the court was concerned that the stock ownership requirement of DGCL Section 327 might inadvertently allow a decade-long potential scheme to escape scrutiny. Thus, the court only conditionally dismissed those claims that pre-dated the plaintiff's stock ownership, subject to a hearing to determine if there were any other shareholders available to pursue such claims during the earlier period of alleged wrongdoing.
Here is a story on the Delaware Grapevine site about Delaware's Department of Justice, through its Attorney General, withdrawing from representation in order to avoid a conflict of interest while it investigates the Delaware Psychiatric Center. Thus, the DPC needs to hire a private lawyer.
A little background for readers outside of Delaware: Unlike other states, the AG's office in Delaware also serves as a local prosecutor as there is no "district attorney" for counties or cities in Delaware as there is in many other states, to investigate and prosecute local crimes. The AG serves that role. (Delaware only has 3 counties). The AG, an elected office in Delaware, serves as the lawyer for most state agencies as well. So, where, as here, the AG is investigating a state agency or entity, that entity needs to find another lawyer to represent it.
Melzer v. CNET Networks, Inc., 2007 WL 2593065 (Del. Ch., Sept. 6, 2007), read opinion here. This is a Chancery Court decision addressing a discovery dispute in the context of 8 Del. C. Section 220. Many cases interpreting DGCL Section 220, regarding a shareholder's right to demand books and records, have been summarized on this blog. (E.g., one could simply type the numbers "220" in the "search box" to the right.) Due to the limited scope and summary nature of the proceeding, and the restricted discovery allowed, however, there are not quite as many published decisions on discovery disputes related to Section 220. The court compelled the plaintiff stockholder to produce two things pursuant to Rule 37, and in turn, discussed the allowable scope of discovery under Rule 26 in the context of a 220 case.
First, the court ordered the production of a "solicitation letter" that the plaintiff argued was privileged as an attorney/client communication. Explaining the "at issue" doctrine, as an exception to the privileged nature of attorney/client communications when the plaintiff raises an issue that relates to such privileged data, and in order to prevent the plaintiff from using the privilege as a shield to prevent inquiry into matters that they allege, the court applied the doctrine to compel the disputed data. The court reasoned that the compelled data would be relevant to the purpose of the demand under 220. For example, did the letter suggest to the plaintiff the purchase of shares so as to bring the lawsuit, contrary to public policy in Delaware that opposes the "purchase of grievances". See, e.g., recent Chancery Court Polygon decision addressing that policy, and summarized here.
Second, the court compelled plaintiff to produce: " information regarding the credible basis for plaintiffs' belief that there was wrongdoing (i.e., alleged backdating of stock option grants)...." This was consistent with established caselaw that requires a "credible basis" for alleging wrongdoing as a basis for demanding books and records under Section 220.
In the process of dispensing with this discovery issue, the court summarized many of the key aspects of a Section 220 case, in terms of the prerequisites for bringing such an action and the factors that the court considers in reviewing such claims.
B. F. Rich Co. v. Gray, (Del. Supr., Sept. 11, 2007), read opinion here, is a rare decision of the Delaware Supreme Court to the extent that it reverses and remands a Chancery Court decision. (The Chancery Court's decision was summarized on this blog here.) There is nothing unusual about the Delaware courts applying the law of another state as this one does, but since this blog focuses on Delaware law, I do not want to spend too much time on this 31-page opinion. The law of another state was applied to determine the validity of a written consent on behalf of minors (who were residents of that other state), in a Section 225 dispute.
I think the Court's own summary of the case, from the opinion itself, serves my purpose here in describing enough about the case that the interested reader can download the entire opinion at the link above for his or her reading pleasure. Here is how the court summarized the case:
Two minor children, who reside in Connecticut, own 49% of the stock of a Delaware corporation. The father of those minor children voted that stock to gain operational control of that corporation without having first been appointed as guardian of his children’s estate (property). A Connecticut statute requires the appointment of a guardian of a minor’s estate where a parent receives or uses property of the minor child having a value exceeding $10,000. The value of the minor children’s shares exceeds $10,000. The sole question of substance on this appeal is whether the father’s voting of the minor children’s shares constituted a “use” of those shares within the meaning of the Connecticut guardianship statute, thus requiring the appointment of a guardian of the minor children’s estate to vote the shares. We hold that the father’s voting of those shares constituted a “use” of the shares within the meaning of that statute. As a consequence, the voting of the children’s shares by anyone other than a court-appointed guardian was invalid, with the result that less than a majority of the corporation’s shares were validly voted and the written consent action had no legal force. Because the Court of Chancery reached a contrary result, we reverse and remand.
In Swinford v. World Aviation Systems, Inc. (Del.Ch., Aug. 29, 2007), read opinion here, the Chancery Court dealt with the attempted enforcement by an ex-employer of an agreement with an ex-employee to arbitrate disputes. The ex-employee refused to admit that the signature on the document was his. Instead, he claimed that his signature was forged. In light of a number of factors, the Court relied on the testimony of a handwriting expert and other circumstances to conclude that the signature on the document actually was the signature of the ex-employee, and therefore, the arbitration provisions of the agreement would control. The facts of this case are unusual, but the decision shows that one can prove that a person signed a document even if the alleged signer denies it.
Professor Bainbridge has graciously linked here to an article about Delaware law bloggers that mentioned me. I will be perpetually grateful for his very kind comments about my blog. It is hard to imagine a much more gratifying experience for a Delaware law blogger.
I am up to date on my blog summaries of key Delaware Chancery Court and Supreme Court cases so I am indulging in this exception to the constraints of humility (though my clients do not seem to be looking for that trait in me.)
Here is an post on the Harvard Corporate Governance Law Blog about an article co-authored by J.W. Verret, a former law clerk on the Delaware Court of Chancery, and Delaware Supreme Court Chief Justice Myron T. Steele, about the activities of the members of the bench of the Delaware Supreme Court and Chancery Court off the bench that contribute towards an elucidation of Delaware corporate jurisprudence that helps to "minimize the level of uncertainty that may be systemic to the interpretation of corporation law by a court of equity". This in turn contributes to promoting Delaware's prominence in corporate law. The article summarizes those extrajudicial efforts as follows:
–The Judges frequently give speeches and write articles about the direction and patterns they perceive in the line of cases from their vantage point;
–The Judges include analysis in the opinions that, though technically “dicta,” provide useful insight into how open questions not part of the ruling might be resolved; and
–The Judges frequently undertake formal policymaking roles as members of Committees of the ABA and other model rulemaking bodies
In Franklin Balance Sheet Investment Fund v. Crowley, 2002 WL 2495018 (Del. Ch., Aug. 30, 2007), read opinion here, the Chancery Court awarded fees in connection with the settlement of a class action suit that alleged breach of fiduciary duty and waste in connection with life insurance policies obtained for the controlling shareholder.
The court rejected the defendants' argument that a quantum meruit, instead of a "common fund" approach to fees should be used. The court attributed most of the gains realized to the suit, but did not award fees based on a pure "common fund" approach due to other factors involved. Rather, the court awarded 15% of the gain up to a certain amount, and then 5% of the remaining amount of the gain.
A prior procedural decision in the case was summarized on this blog here.
In Mahani v. EDIX Media Group, Inc., (Del. Supr., Sept. 4, 2007), read opinion here, the Delaware Supreme Court affirmed a decision of the Chancery Court awarding attorneys' fees based on a contract provision between the parties to the case. Mahani appealed based on the arguments that the trial court did not: (i) consider the reasonableness of the amount of fees, and (ii) did not give ample weight to the fact that there was only a partial victory in the trial court. The Chief Justice, writing for the Delaware Supreme Court, distinguished the contractual and statutory bases for awarding fees, and reasoned that:
...the reasonableness of attorneys’ fees and other expenses in a contractual fee shifting case “should be assessed by reference to legal services purchased by those fees, not by reference to the degree of success achieved in the litigation.”
The cases Mahani cites are inapposite because they are statutory fee shifting cases, in which the court awarded the prevailing parties’ attorneys’ fees and expenses in proportion to their success as an incentive for other attorneys to prosecute cases that enforce legislative goals. EDIX’s award for the full amount of its attorneys’ fees and other expenses cannot be considered unreasonable because the Chancellor properly weighed all the factors in DLRPC 1.5(a). The Chancellor, we believe, correctly concluded that “[t]he amount involved in litigation and results obtained [were] only two of many factors to be considered,” and, indeed, he placed considerable weight on the time and labor necessary for EDIX to prepare the case for trial.
The trial court's decision on fees was summarized on my blog here. The trial court's main opinion was summarized here, in which the Chancery Court quotes from the argot of famed rapper "50 Cent".
In LaPoint v. AmerisourceBergen Corp., (Del. Ch., Sept. 4, 2007), read opinion here, the Chancery Court ruled that a merger agreement was breached in connection with an "earnout provision", and awarded former shareholders of the acquired company $21 million in damages. Amerisource has vowed to appeal, as reported by Bloomberg News here. The Chancellor provided an introductory overview of the case that deserves to be quoted, as follows:
This case falls into an archetypal pattern of doomed corporate romances. Two companies—Bridge Medical, Inc. and AmerisourceBergen Corporation--agree to merge, each convinced of a happy future filled with profits and growth. Although both partners harbor some initial misgivings, the merger agreement reflects these concerns, if at all, in an inaccurate and imprecise manner. After some time, the initial romance fades, the relationship consequently sours, and both parties find themselves before the Court loudly disputing what the merger agreement “really meant” back in its halcyon days. If this case is different, it is only in the speed with which the ardor faded.
UPDATE: Here is the affirmance by the Delaware Supreme Court in a 7-page Order dated April 8, 2008, upholding the Chancellor's opinion.
In The Follieri Group LLC v . Follieri/Yucaipa Investments, LLC, 2007 WL 2459226 (Del. Ch., Aug. 23, 2007), read opinion here, the Chancery Court decided a preliminary issue in a business dispute involving a joint venture entered into by the rich and famous. The Court denied the effort of a putative creditor (of the LLC sought to be dissolved) to intervene pursuant to Chancery Court Rule 24(a)[as of right] or 24(b)[permissively]. The issue in the main attraction [original complaint] was an attempt by one of the parties to the LLC to dissolve it pursuant to Section 18-802 of the Delaware Limited Liability Company Act. That section allows for dissolution when it is no longer reasonably practicable to carry on the business of an LLC pursuant to the operating agreement. The court reasoned that the attempt by the creditor to collect an alleged debt had nothing whatsoever to do with the issue to be decided under Section 18-802 of the Delaware LLC Act. Moreover, if a dissolution were ultimately ordered, both Sections 18-803 [winding-up] and 18-804 [distribution of assets] of the LLC Act provide for dealing with creditors.
The parties to this dispute include billionaire Ron Burkle and Raffaello Follieri, an aristocratic young gentleman from Italy, who is well-known among upper-crust circles in his own right, but became more famous during the last few years if only because his frequent female companion is the movie actress, Anne Hathaway (The Devil Wears Prada and Becoming Jane). Here is a recent celebrity photo and background story for those of you who do not read People magazine or the National Enquirer (which I assume is 99.9% of the readership of this blog.) An article from The Wall Street Journal here has slightly more business-minded background about the plaintiff in this case.
UPDATE: Here is a link to a front page article in The Wall Street Journal about Follieri on September 26, 2007 that also references the pending litigation.
In Fleischman v. Huang, 2007 WL 2410386 (Del. Ch., Aug. 22, 2007), read opinion here, the Chancery Court, in quite forceful terms, refused to certify an interlocutory appeal of a discovery order, reasoning that the requirements of Supreme Court Rule 42 were not met. The Court further denied a motion to stay the order pending appeal pursuant to both Chancery Court Rule 62(d) and Supreme Court Rule 32(a). The Chancery Court earlier had granted a motion to compel certain limited discovery. Specifically, in this shareholder derivative action, the defendants filed a motion to dismiss for failure to make a pre-suit demand under Chancery Court Rule 23.1 -- which is a basis to use Rule 12(b)(6) alleging the more generic "failure to make a claim". (See footnote 15). In their motion to dismiss, the defendants referred to a report of the Audit Committee--which plaintiff did not have and that was apparently not in existence when the complaint was filed.
In somewhat harsh terms, the court made it clear that it was not fair for defendants to base their motion on a report that they then refused to provide to plaintiffs. Moreover, the Court emphasized that it was not making new law, nor was it in conflict with other decisions, nor did it establish a substantive legal right. Nor was the court allowing wholesale discovery prior to deciding a Rule 23.1 motion. Rather, the court granted a limited procedural right of access to a document that the defendant expressly relied on in their motion to dismiss.
This case is an example, among other things, of how hard it is to appeal a discovery ruling.
UPDATE: Here is the Order of the Supreme Court affirming the Chancery Court (denying an interlocutory appeal).
ASIDE: Some of the arguments in this case made me think of a phrase I came across recently. I was reading the current issue of The Economist magazine at a family gathering yesterday (two of my brothers subscribe), and I read a phrase that I was eager to use. In referring to a certain company, but equally applicable to many lawyers and other people we all know, the lead article described this familiar situation: ... cocksure assertions of its own holiness, as if they merited unquestioning trust.
In Highfields Capital, Ltd. v. AXA Financial, Inc., 2007 WL 2410295 (Del. Ch., Aug. 17, 2007), read opinion here, the Chancery Court rejected the expert testimony of the experts of both parties and arrived independently at its own valuation in this appraisal proceedings pursuant to Section 262 of the Delaware General Corporation Law (Title 8 of the Delaware Code), in connection with the all-cash, all-shares merger of an insurance company. In this thorough opinion, the court engaged in a lengthy analysis and reasoned that a "combined sum-of-the-parts and shared synergies analysis is the most reliable valuation methodology in this litigation." In footnote 48, the court noted that the parties' post-trial briefs "are like two ships passing in the night, with each litigant showing an equal amount of tedium in attacking (often with good cause) every assumption used or conclusion reached by the other parties' expert, no matter how minor."
This case can serve as a helpful tutorial on Delaware appraisal actions and the DCF as well as other valuation methods considered by the Delaware courts. Footnotes 20 through 30 contain an excellent collection of seminal Delaware cases on appraisal proceedings and the corresponding standards that the courts apply in these cases.
UPDATE: Professor Bainbridge graciously links to my post here.
In Baldwin v. Carmack, 2007 WL 2410377 (Del. Ch., Aug. 17, 2007), read opinion here, the Chancery Court, in connection with a motion for partial summary judgment, in a one-page letter ruling refused a request for the court to strike a portion of a brief based on the argument that the brief included inadmissible settlement discussions contrary to Delaware Rule of Evidence 408. The court reasoned that none of the statements were intended as offers of compromise or settlement.
Nor does Rule 408, the court explained, require the exclusion of "statements or documents presented in the course of compromised negotiations when such statements are offered to prove a party's knowledge or understanding of certain disputed facts".
Two recent Chancery Court decisions on the same day addressed two different arbitration issues.
In John L. Briggs & Co. v. EDiS Co., 2007 WL 2410388 (Del. Ch., Aug. 16, 2007), read opinion here, the Chancery Court granted a preliminary injunction to stop the upcoming scheduling conference for an arbitration proceeding that had been initiated with the American Arbitration Association, until such time as the court could address the underlying issue of a statute of limitations defense. The court cited to several Delaware statues that the plaintiff relied on, such as Section 5703(b) of Title 10, for enjoining the arbitration due to the the arbitration claim being barred by the statute of limitations in Section 8127 of Title 10 or Section 8106 of the same title. The court noted that the action was properly brought within 20 days of the arbitration demand pursuant to Section 5702(c) of Title 10. The court found that the prerequisites of injunctive relief were met.
In the case of In re: Audio Visual Xperts, Inc., 2007 WL 2410378 (Del. Ch., Aug. 16, 2007), read opinion here, the Chancery Court, in a short letter ruling, granted a motion to dismiss a suit seeking appointment of a provisional director to break a deadlock in a company owned by two 50/50 shareholders. The dismissal was based on a prior shareholders' agreement the parties entered into requiring any and all of their disputes to be arbitrated. The court reasoned that such a broad provision included claims such as those at issue in this case.
Delaware Supreme Court Chief Justice Myron Steele recently gave a speech to the Business Law Section of the American Bar Association at its Annual Meeting. He provided excerpts from an upcoming law review article that explains the ways in which the Delaware judiciary provides guidance for the many businesses and their lawyers who need to abide by Delaware law.
Many of the numbers indicative of why Delaware law is important to our country's businesses, are familiar to readers of this blog, but the updated figures warrant repetition. There are many volumes that have been written about how and why Delaware maintains its national prominence in corporate law. This short post only highlights some of the "net numbers" aspect of that multi-faceted topic. As reported in the August 22, 2007 issue of the Delaware Law Weekly, in connection with the Chief Justice's speech, here is a sampling of the key data: As of April 2007, over 61% of all Fortune 500 companies were incorporated in Delaware, according to the Administrative Office of the Courts. Since 1973, 75 percent of all U.S. initial public offerings selected Delaware as their state of incorporation.
The revenue that the legal industry generates for the State of Delaware is also of vital importance to the First State and its residents as well. Over $709 million or 21.6 percent of all of the state's general fund revenue in fiscal year 2007 came from the corporate franchise tax and related fees. Corporations generated another $15 million in special fund revenue and about $10 million for local governments.
In the case of In Re Fruehauf Trailer Corp., 369 B.R. 817 (Bankr. Del., June 2007), read opinion here, the Bankruptcy Court for the District of Delaware, based on Delaware state law, denied a motion to dismiss a fiduciary duty claim that the defendant argued was duplicative of contract claims. The Bankruptcy Court provides a very educational discussion of Delaware state court decisions that have addressed the issue in gerneral, but found that none of those cases were applicable to the facts of this case, involving a claim by a successor trustee against the original trustee of a liquidating trust. The court concluded that at this early stage it would premature to dismiss the claims on that basis and that there was clearly a fiduciary duty imposed on the trustee.
For those of us who have been mediators and who have participated in the mediation process on behalf of clients, the cartoon below, courtesy of Charles Fincher at www.lawcomix.com, is an good example of why some mediations are not always productive.
In Tucker v. Lawrie, (Del. Ch., Aug. 17, 2007), read opinion here, the Chancery Court decided that the most recent Will signed by the deceased was not entered into while she was of sound mind. This Will contest is replete with classic sibling rivalry, in terms of fighting over the Will of a parent.
Doe v. Norwalk Community College, 2007 WL 2066497 (D. Conn., July 2007), read opinion here. This case is a good reminder of the importance, especially under the new e-discovery rules, to preserve electronic discovery. In order to avail oneself of the new safe harbor provision of Federal Rule of Civil Procedure 37(f), a routine system of data management must be in place and some affirmative action must be taken to prevent that routine system from destroying or altering information once awareness of a claim is presumed. In this case, the defendant utterly failed to preserve the hard drives of key witnesses. Moreover, instead of preserving them, those hard drives had been scrubbed or completely wiped of data and the expert of the plaintiff, who was allowed to inspect certain computers of the defendant, found other suspicious inconsistencies in the PST or Outlook e-mail files.
Due to their failure to suspend the routine document destruction policy and to “put a litigation hold in place,” the court rejected any safe harbor arguments under Rule 37(f). Rather, the court found that the plaintiff was entitled to an adverse inference jury instruction with respect to the destroyed evidence, as well as awarding the plaintiff reasonable attorneys’ fees and costs in connection with the motion, as well as expert fees incurred with respect to the forensic investigation of the defending computers. Here is a more detailed summary on the E-discovery Law blog.
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